Thursday, August 30, 2012

Denny’s Could Be Liable for Attack on Franchise Patron

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

Under California law, the franchisor of Denny’s restaurants and several affiliated corporate entities could have been liable under a theory of ostensible agency for the injuries a patron of a franchised restaurant sustained in a beating by a group of street gang members and associates who "took over" the franchisee’s Denny’s restaurant most Saturday nights over a period of two years, a California appellate court has held.

There were three requirements necessary before recovery could be had against a principal for the act of an ostensible agent under California law:

(1) The person dealing with the agent must do so with belief in the agent’s authority and this belief must be a reasonable one;

(2) Such belief must be generated by some act or neglect of the principal sought to be charged; and

(3) The third person in relying on the agent’s apparent authority must not be guilty of negligence.

The franchise agreement specified that the franchisee was an independent contractor. However, it did give the franchisor some control over the franchisee’s business practices, including vendors, uniforms, menus, signs, and advertising. The agreement required the franchisee to keep the restaurant open 24 hours a day, seven days a week. But the franchisor allowed individual franchisees to deviate from this requirement if a risk assessment showed above-normal criminal activity during late-night hours. Some 15 restaurants nationwide had been allowed to close during the late-night "bar rush" period when the patron’s injuries were sustained, the court noted.

The franchisee was required to comply with the Denny’s Brand Standards Manual, and this manual gave one of the Denny’s entities other than the franchisor some control over the franchisee’s business practices, the court determined.

The franchisee did business as "Denny’s," using the Denny’s name, logo, and other trademarks. While some Denny’s restaurants were franchisee-operated, others were corporate-operated. Thus, it was not common knowledge that all Denny’s were necessarily franchises, according to the court.

There was no signage or other indication that the particular Denny’s was actually operated by a franchisee. Moreover, the injured patron testified that he had seen advertisements identifying Denny’s as "a family style restaurant…in which a patron could enjoy a good meal in a friendly, safe, and secure environment" and that this led him to conclude that he and his friends could enjoy a meal at the particular location. These statements were sufficient evidence of reliance, the court ruled.

The Denny’s entities did not even argue that ostensible agency did not apply, the court commented. However, they did raise the following policy argument: "[I]f the law ultimately holds franchisors routinely liable for the wrongful acts of its franchisees and their employees, franchisors will either quit franchising or, at the very least, charge much higher fees." A similar argument had already been rejected by a California appellate court and was rejected here.